Citi Upgrades Macau Gaming; Melco Crown, Sands China Top Picks

By Shuli Ren

AP

Having delivered stronger-than-expected gross gaming revenue (GGR) for four months in a row, Macau is turning out to be a larger gaming market and the industry as a whole deserves an upgrade, says Citi.

A new railway line and a new theme park will drive more mainland visitors to visit Macau. Here are Citi analysts Anil Daswani, George Choi, Raymond Choi and Solomon Chuen:

After the completion of Guangzhou-Zhuhai Intercity Railway (Gongbei extension) in December last year, mainland visitation growth has been accelerating. We expect the strong momentum to continue as visitors can now spend more time at casinos (especially during peak times i.e. Golden Weeks) following the increase in immigration handling capacity in June.

The opening of Chimelong International Ocean Resort (expected in late 2013) will provide new hotel capacity and drive tourist arrivals to Macau.

As a result, the analysts raised their 2013 and 2014 GGR forecasts to $44 billion and $51 billion respectively.

Not only that, Macau casinos’ trading multiples also got an upgrade:

We now apply a 12x forward EBITDA multiple when valuing Peninsula casinos and a 13x forward EBITDA multiple when valuing Cotai casinos (previously 11x and 12x, respectively). Our target multiples are roughly +1 StDev above historical mean. In our view, the Macau gaming sector could further re-rate because Macau will be in a sweet spot in 2014, as it will see no new casino supplies until mid-2015.

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Barron’s veteran Dimitra DeFotis has been blogging about emerging market investing since traveling to India and Turkey. Based in New York, she previously wrote for Barron’s about U.S. equity investing, including cover stories and roundtables on energy themes. Dimitra was among the first digital journalists at the Chicago Tribune and started her career as a police reporter at the Daily Herald in the Chicago suburbs. Dimitra holds degrees from the University of Illinois and Columbia University, where she was a Knight-Bagehot Fellow in the business and journalism schools. She studies multiple languages and photography.